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Banking

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.

Central Banking - The practice of establishing a country's monetary policy through a government-owned or -controlled institution

Articles

"... the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick ..."

"Those few people who understand the inherent moral fraud in all fractional reserve banking find that they are not understood by their peers. They also find that their arguments are not taken seriously by academic economists. They find it difficult to explain why the entire profession has made a monumental methodological error in not applying the theory of monopoly to central banking."

Competing Money Supplies, by Lawrence H. White, The Concise Encyclopedia of Economics
Discusses the arguments in favorand against free banking, with multiple private banks issuing their own notes, including historical precedents and proposals for the medium for note redemption

"Competition among banks would, history indicates, compel all banks in the system to redeem their deposits and banknotes for a common basic money, such as gold or a standard paper currency issued by the government. ... To attract customers, Citibank would be glad to accept deposits in Chase notes or Chase deposits, which it would then return to Chase for redemption at the clearinghouse. ... The reason is that by agreeing to accept each other's notes and checks at par, both Citibank and Chase would make their own money more useful, and therefore more widely accepted."

"When a depositor places a sum of money in a checking account at a fractional-reserve bank, the bank may loan out 90% of his deposit to another person with the assumption that the depositor will not withdraw all of his funds. When the bank extends such a loan, the depositor has effectively loaned his money to the borrower, but without his knowledge. In fact, both the depositor and the lender will have legal title to the same sum of money at the same time."

"I never believed that banking was a strong exception to my free market ideas. I always insisted that the state should assume no supervision over entry into the banking business. It should, in fact, encourage the erection of as many banking enterprises as possible, and it should give monopolies to none."

"... you have to ask if the bank gets an application from, say, blacks and whites, is it giving up profits in order to avoid lending to blacks? A profit test would be the crucial test. ... Presumably, black-owned banks do not discriminate against blacks, or not as much as white-owned banks. Are they lending to blacks in greater propensities and making a higher return on their investments? Or what are the policies and profits of female-owned banks? I do not know the answer to those questions, but my belief is that the Boston Fed study greatly overstated the degree of discrimination by banks. That does not mean there's none."

Jean-Baptiste Say: Neglected Champion of Laissez-Faire, by Larry J. Sechrest
Biographical and bibliographical essay, discussing Say's life, methodology and his writings on money, banking, the law of markets, entrepreneurship, capital, interest, value, utility, taxes and the state

"... 'banks of circulation' ... hold fractional reserves, issue banknotes, and generate an interest income by discounting promissory notes and bills of exchange. ... Say even argues that these fractional-reserve-holding banks ... bestow a benefit upon society because they provide 'the advantage of economizing capital, by reducing the amount of the sum kept in reserve.' And if it happens that such fractional-reserve banknotes also supplant part of the specie that had been in circulation, then 'the functions of the specie, that has been withdrawn, are just as well performed by the paper substituted in its stead.'"

Les Economistes Libertaires, by Carl Watner, Reason, Jan 1977
Discusses the French economists of the 19th century and in particular Gustave de Molinari and his thoughts on the provision of security and defense services by private agencies

"Although Molinari made these compromises with the State, he was not so ready to concede any government involvement in monetary matters. As Vera Smith noted, the subject of centralized, 'state controlled banking vs. free banking was one of the most keenly debated of its time in France ...' Molinari thought the money industry should be open to free competition. It was his view, says Gaetan Pirou, that 'banks should be free to offer metal coins or paper money and the public [should be free] to choose whichever served their best interest.'"

"Through the National Banking Act of 1863, Congress guaranteed the notes of authorized bankers and legally protected them from liability for debt. A national tax of 10 percent for all money not authorized by Congress was also established. Through such measures, Spooner believed that Congress held a de facto and unlawful monopoly over the most important industry to the American economy — banking."

"How a free banking system would create incentives on the part of those owning and managing unregulated private banks to restrain their issuance of what Mises called 'fiduciary media' (bank notes and bank deposit accounts not 100 percent fully covered by gold and other specie reserves in their banks) was concisely explained by him in Monetary Stabilization and Cyclical Policy ..."

"... these emerging bankers soon came to realize that they could extend additional loans to borrowers in the form of 'notes' that looked exactly like the warehouse receipts issued to their gold and silver depositors. ... This, Rothbard argued, was the beginning of 'fractional-reserve banking.' ... that also meant that the total face value of notes and receipts in circulation now exceeded by some multiple the amount of gold and silver against which they represented a claim."

Money and Banking, by Lawrence H. White, The Encyclopedia of Libertarianism, 15 Aug 2008
Discusses some of the issues regarding money, whether state- or privately issued, and banking, including central banks, such as the Federal Reserve, fractional reserve banking and free (fully unregulated) banking

"Perhaps because early banks often operated under exclusive state charters, some classical liberal thinkers ... condemned bank-issued money that rested on fractional reserves as per se illegitimate. They called for a return to 'hard money,' a system that relied only on coins made of precious metals or on certificates fully backed by precious metals. Others ... called for free banking, or the complete separation of banking and the state. In their view, governments should neither shelter banks from market competition nor restrict the sorts of contractual arrangements, including fractional reserves that banks may make with their customers."

"Hobson's focus on the crucial role of overseas investment outlets naturally brought him to emphasize the strategic position of international bankers ('the central ganglion of international capitalism') in formulating imperialist policies ... Like Hobson, Moon attributed particular importance to the role of bankers: 'The most influential of all business groups, the bankers, may be said not only to have a direct interest in imperialism, through colonial investments, but to represent indirectly all the above-mentioned interests, for banks have financial fingers in every industrial pie' ..."

"This is hardly to suggest that all was well with banking before Dodd-Frank. Not by a long shot. The industry was a corporatist monstrosity, a cartelized affair that included government deposit insurance, which protects banks from conscientious depositors who would otherwise scrutinize their lending practices. But the 1999 repeal of one section of Glass-Steagall was not among the problems."

The Many Monopolies, by Charles W. Johnson, 24 Aug 2011
Describes four ways in which markets are distorted by government interventions, explains Tucker's "Four Monopolies", examines five present-day monopolies and discusses Tucker's libertarian views

"Tucker saw that monetary control not only secured monopoly profits for insulated banks, but also concentrated economic ownership throughout the economy, favoring the large, established businesses that large, established banks preferred to deal with. Tucker identified the Money Monopoly as an economic force in 1888—before the Fed and fiat currency, the FDIC, Fannie, Freddie, the IMF, or trillion-dollar bailouts to banks 'too big to fail.'"

"Rothbard's presentation of the basic principles of money-and-banking theory in the first eleven chapters of the book guides the reader in unraveling the mystery of how the central bank operates to create money through the fractional-reserve banking system and how this leads to inflation of the money supply and a rise in overall prices in the economy."

"Fractional reserve banking is a term describing the capital structure of a bank that has loaned funds that were placed there on deposit. This is problematic because deposit and loan transactions are fundamentally different. A deposit is a contract for the storage of currency in the bank to be held in safekeeping and returned immediately on demand. The deposited funds must be available at all times should the depositor wish. In contrast, a loan is a transfer of ownership and availability for a definite term."

"We can thus see here that as long as banks facilitate commodity credit, they should be seen as agents of wealth generation. In contrast, whenever banks embark on the lending of circulation credit they in fact become agents of real wealth destruction. As opposed to commodity credit, circulation credit is not supported by any real saving. This type of credit is just an empty claim created by banks."

Cartoons and Comic Strips

Books

Ludwig von Mises: Scholar, Creator, Hero [PDF], by Murray Rothbard, 1988
Partial contents: The Young Scholar - The Theory of Money and Credit - The Reception of Mises and of Money and Credit - Mises in the 1920s: Economic Adviser to the Government - Mises in the 1920s: Scholar and Creator

"Mises distinguished two separate kinds of functions undertaken by banks: channeling savings into productive credit ('commodity credit'), and acting as a money-warehouse in holding cash for safekeeping. Both are legitimate and non-inflationary functions; the trouble comes when the money-warehouses issue and lend out phony warehouse receipts (notes or demand deposits) to cash that does not exist in the bank's vaults ('fiduciary credit')."